The Bureau of Labor and Statistics jobs report: Investor takeaways

The Bureau of Labor and Statistics jobs report: Investor takeaways (Part 1 of 7)

Why are bonds so volatile on the first Friday of the month?

Employment data and bond volatility

One of the most important recurring events for the bond market occurs at 8:30 EST on the first Friday of every month. This is when the U.S. Labor Department’s Bureau of Labor Statistics (or BLS) reports the key employment data for the previous month in its Employment Situation Summary report.

Bond market reaction in anticipation to ADP and BLS jobs reportsEnlarge Graph

The ADP National Employment report is another jobs report, which sets the stage for the BLS report by reporting its figures on Wednesday in the same week that the BLS report is scheduled to come out on Friday. We cover the importance of employment indicators, job reports, and the latest ADP report and analysis in the Market Realist series Why should investors follow the ADP jobs report?

Included in the BLS Employment Situation Summary report is information related to all aspects of the job market, including the unemployment rate, the absolute number of jobs added or lost, total hours worked, average hourly wages, and how the jobs picture for various sectors has fared (such as governments, restaurants, or manufacturing). Of all the economic reports released each month, the jobs report has the largest impact on the bond market.

The impact of a positive jobs report

Since jobs are so important to the economic outlook, investors take a positive report as a sign that growth is on track. This tends to depress bond prices for two reasons.

  1. Stronger growth raises the likelihood of inflation. Since higher inflation eats away at bond prices, the prospect of rising price pressures is typically a negative for bonds.
  2. It makes the Federal Reserve more likely to raise interest rates in the future to tackle inflationary pressure arising out of improved economic conditions. Since the Fed funds rate heavily influences yields on short-term bonds, the prospect of the Fed raising rates causes yields to rise and prices to fall for Treasuries and other rate-sensitive segments of the market, such as municipal bonds, mortgage-backed securities, and higher-quality corporate bonds.

The chart above shows the price reaction of major bond market exchange-traded funds (or ETFs). The iShares Barclays 1-3 Year Treasury Bond Fund (SHY) and the iShares Barclays 20 Year Treasury Bond Fund (TLT) are popular ETFs in the Treasury universe, while the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD), with the bonds of companies like Apple Inc. (AAPL) and Goldman Sachs (GS) in its portfolio, is popular in the corporate bond ETF segment.

The impact of a negative jobs report

A weaker jobs report tends to be positive for the bond market for the opposite reasons of what we just discussed. It makes the Fed more likely to cut rates than to increase rates, and it reduces the odds of inflation. Both are positive for the performance of U.S. Treasuries and other rate-sensitive investments.

The next part of the series discusses the two main components of the BLS Employment Situation Summary Report.

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